Should (Some) Banks & Insurance Companies Be Transformed into Public Utilities?

Bank of England Governor Mervyn Kings should be applauded for raising the proposition that those bank and presumably insurance companies that are “too big to fail” should be converted into public utilities. His thinking reflects the belief that it is fanciful to expect that new institutions, new laws, new regulations combined with enhanced regulatory enforcement can prevent future financial crises of the nature that is currently being experienced globally.

Many of those surviving private banks and insurance companies have succeeded due to a combination of factors including central banks dramatically cutting interest rates, making public funds available to bail out (and in some cases take equity positions) institutions at risk and encouraging the merger of some entities, apparently with minimum concern being paid to the potential anti-trust implications.

Some companies, including a number of financial firms and manufacturers selling their products to corporations and individuals, are currently showing surprisingly high profits. In most cases this is a result of significant cost cutting (including jobs and benefits, i.e. thus in many instances shifting the costs to the public/government). It is doubtful that this situation will be sustainable.

Corporations may have delayed purchases for the last year until the dust from the global economic situation has settled. The very persons who buy consumer products are likely to be more reluctant to make major purchases if they have lost their jobs, have accepted a reduction in salary or benefits or fear losing their jobs. In the U.S. most retailers are predicting lower consumer spending than last year. One should not forget that stores announced their Christmas sales earlier than usual. Many American consumers regard something being “on” as opposed to merely “for” sale to be the norm.

In the financial sector a large share of the problem has been and remains the extraordinarily high salaries paid to individuals who receive salaries and bonuses in the hundreds of thousands (and in some cases millions) of dollars. Symbolic gestures like executives forgoing their salaries or bonuses make nice headlines, but within the context of their past earnings and severance packages do not represent a sacrifice. How much money does someone need to maintain a glamorous life style?

Essentially, those who deal with high-value transactions feel they are entitled to huge levels of compensation as if they are entitled to a cut of the deal – sort of the way that protection rackets operate. Granted, many of these individuals are bright, dedicated and experienced professionals, but do they really work much harder than their counterparts working on smaller transactions, to say nothing of blue-collar workers or individuals who hold two jobs to support their families? What about people in the third world maintaining a subsistence living? The juxtaposition of the world’s wealthiest individuals and its poorest is truly astounding.

Many individuals wonder why this country’s bankruptcy rules were not applied to financial institutions when Congress recently changed them to make them less consumer (debtor) friendly. Some specialists propose establishing windfall taxes or taxes on bonuses beyond a certain size. This is unlikely to occur. We know from public choice theory that it is doubtful that Congress will enact such laws. Members of these entrenched special interest groups will hire lobbying firms and make campaign contributions that almost effectively kill such proposals. Who represents the public at large?

In general, the many experienced lawyers and members of the financial community who have left their lucrative jobs to take positions in the government should be commended. In a sense, they are today’s dollar-a-year men (even if they draw salaries from the government representing a small fraction of their past earnings). Most are making financial sacrifices for the public good or the sense of accomplishment that would go with rectifying a broken system.

Nonetheless, one has to wonder after applying their knowledge for the public good, whether they will stay in government or return to the private sector where they will be handsomely rewarded to take advantage of their knowledge of the workings of whatever new regulatory bodies and rules will be established and the contacts that they make along the way. They will no doubt be attractive employees (rain-makers) to a range of companies or they may become independent consultants, willing to work on behalf of a multitude of clients.

George Mason University Professor Janine Wedel would term these individuals “flex people” – persons without loyalty to any particular institution – who may enter the world of academia and think tanks, becoming talking heads on television, or produce regular columns to improve their bone fides as a consultant. Limitations established by revolving door rules are inadequate today and almost certainly likely to remain so as law tends to lack behind practices by many years.

The U.S. government clearly benefits from being able to attract high caliber people from the private sector. It must be careful not to deny itself the expertise it so desperately needs.

I think this leaves us with one choice. Those private institutions “which are too big to fail” should be transformed into state-owned bodies. I fear what might pass for political debate over important policy issues. The terms “socialism” and “big government” scare a large segment of the population with respect to the debate over establishing a national health care system with a “public option.” The U.S. is the only developed country in the world without uniform health care coverage and the public option would be voluntary (and in theory would drive the private sector to be more competitive. How does one classify the work of the FDIC, Medicare and Social Security? Socialistic might be a term that would be appropriate.

An increased role for the federal government would discourage the over-expansion of financial institutions and insurance companies and preserve the dominant position of the private sector in the U.S. economy (populated with more smaller and arguably competitive entities). The financial institutions and insurance companies that are unable to survive without public assistance (a form of welfare), should be taken over by the U.S. Government until they might be broken up and sold off.

Deregulation in the communication sector has produced great technological innovation. In general competition is a good thing. Nonetheless, most electrical and water companies are state-owned. Natural gas and home heating fuel providers are generally well-regulated. What lessons should be drawn from this?